In This Issue: 1 Correctly Using ICs in Oregon 10 Taxation in Popular Culture 12 Legislative Highlights from the 2015 Oregon Legislative Session VOLUME 19, NUMBER 1 Winter 2016 13 Heather Kmetz Newsletter Bio 14 Hon. Jill A. Tanner to be awarded 2016 Roberts Award 14 Award of Merit CORRECTLY USING INDEPENDENT CONTRACTORS IN OREGON: 14 Future Events Understanding ORS 670.600, Oregon’s Independent Contractor Statute

Executive Committee By Dan Webb Howard, Attorney-at-Law1 Barbara Smith, Chair Dan Eller, Past Chair Businesses commonly use contractors, in lieu of employees, to provide certain Jennifer Woodhouse, Chair-Elect services to their customers. For example, a business may use contractors to help deliver Ryan Nisle, Secretary the merchandise or install the products that it sells, provide transportation to and from its Heather Anne Marie Kmetz, Treasurer business location or special events that it sponsors, or provide troubleshooting or repair Members services. Using contractors to provide such services can be a very efficient and cost- Kent Anderson effective business model if they are truly independent contractors. On the other hand, if Jeremy Babener a business’s “contractors” are actually employees mislabeled as contractors, it may be Jonathan Cavanagh setting itself up for a legal and financial disaster. Matthew Erdman In recent years, Oregon’s agencies (especially the Employment Department) have Cynthia Fraser dedicated considerable attention and resources to cracking down on businesses that they Christopher Heuer believe misclassify their employees as independent contractors. Investigations by state Lee Kersten agencies frequently result in the “reclassification” of a business’s contractors as employ- Tricia Palmer Olson ees, with some harsh consequences, including assessments of years of back employment Daniel Robinson taxes, accompanied by accrued interest and stiff penalties. Worse, an adverse finding Scott Schiefelbein by a state agency can prompt a class-action lawsuit seeking back overtime wages and Hertsel Shadian employee benefits on behalf of current and former “contractors,” which can involve stag- gering legal costs and massive potential liabilities. One of the most important contractor classification tests in Oregon is set out in a Newsletter Committee statute, ORS670.600, that defines who is an “independent contractor” (and, by implica- Jeremy Babener tion, who is an employee) for purposes of state employment taxes. Any business that Brent Berselli regularly uses contractors to provide services—and any accountant or attorney who Erik Larsen advises businesses on the propriety of treating certain service providers as “contractors” Mimi Luong for employment-tax purposes—should be well acquainted with this statute and how the Erin MacDonald Oregon courts have interpreted and applied it. Jonathan Mishkin Under ORS 670.600, any individual or entity that provides services to a business for Hertsel Shadian remuneration will be deemed its employee unless that individual or entity, in addition to Laura Takasumi possessing any license necessary to lawfully provide the services in question, is: (a)free Dallas Thomsen from direction and control over the means and manner of providing the services; and (b) Jennifer Woodhouse “customarily engaged in an independently established business.” To pass the “indepen- Previous newsletters are posted on dently established business” test, the hiring entity must prove that three or more of the the Taxation Section website. following criteria are present: (1) the service provider maintains a separate business loca- tion; (2) the service provider bears the risk of loss related to the provision of the services; (3) the service provider provides similar contracted services for two or more persons within a 12-month period (or routinely engages in business advertising, solicitation, or other marketing efforts “reasonably calculated” to obtain new contracts to provide similar services); (4) the service provider has a significant investment in the business; (5) the

Articles in this newsletter are informational service provider has the authority to hire other persons to provide or to assist in providing only, and should not be construed as provid- the services, and the authority to fire those persons. See ORS670.600(3). ing legal advice. For legal advice, please consult the author of the article or your own 1 tax advisor. Dan Webb Howard is an attorney with the law firm Gleaves Swearingen LLP. In the past few years, the Oregon Court of Appeals has Thus, the administrative rules provide some helpful issued a number of important decisions interpreting and guidance. However, they also leave some important ques- applying ORS 670.600. This article examines what those tions unanswered. These include: decisions tell us about how to interpret the statute’s “direc- 1. Exactly how “free” must the contractor be? Does tion and control” test, and each criterion of its “indepen- she need to have complete freedom with respect dently established business” test. every means and manner of performing the services? Does the hiring entity’s control over What Is “Direction & Control,” for Purposes of one method or means of performing the services ORS 670.600(2)(a)? compel a finding of employee status? Or, is it Sections 471-031-0181 and 150-670.600 of the Oregon enough that the contractor is mostly free from Administrative Rules (OAR), identical rules promulgated control with respect to most of the means and by the Employment Department and the Department of manners of performing the services? Revenue, respectively, interpret what it means to be “free 2. Should the factors generally viewed as indicators from direction and control,” for purposes of ORS670.600. of economic dependence under the common- As a preliminary matter, the rules state that being “free law “economic realities” test also be viewed from direction and control” means that a contractor is “free as evidence of control for purposes of ORS from the right of another person to control the means or 670.600? Or, should the statutory language be read manner by which the independent contractor provides ser- literally—i.e., as confining the inquiry to how the vices.” See OAR 471-031-0181(3)(a)(C) (emphasis added). service provider actually “provid[es] the services” Thus, “[i]f the person for whom services are provided has (see ORS 670.600(2)(a)), and whether the hiring the right to control the means or manner of providing the entity controls that (e.g. closely supervises how the services, it does not matter whether that person actually work is performed on an ongoing basis)? exercises the right of control.” Id. Rather, retention of 3. Are constraints on the manner of performing the right to control the means or manner of performing services that emanate from third parties, other the services—even unexercised—is fatal to independent outside sources, or the very nature of the business contractor status. itself properly weighed as evidence of “control”? Conversely, a hiring entity does have a prerogative to Fortunately, recent decisions from the Oregon Court of monitor and inspect the quality of the services provided Appeals provide guidance on these issues. For example, in by an independent contractor, as opposed to his means or Avanti Press, Inc. v. Employment Department, 248 Or App manner of providing them. See OAR 471-031-0181(3)(b) 450 (2012), the court stated that the “direction and control” (“Specifying the final desired results of the contractor’s language in 670.600 was intended to codify the common- services does not constitute direction and control over the law “right to control” test, which has “never required that means or manner of providing those services.”). Thus, con- an ‘independent contractor’ be free from all direction and tract provisions that are confined to ensuring the quality of control.” Id. at 461(emphasis in original). the final product or the services, without interfering with There, the court applied the interpretation of “direction how they are generated or provided, do not create the type and control” contained in OAR4710310181. However, it of “control” that creates an employment relationship. also applied the “right to fire” factor from the traditional, With respect to the “means” of performing the contract- commonlaw right-to-control test—even though it is not ed services, the administrative rules state that, to be free mentioned in the rule—because that factor has always been from direction and control over the means of providing considered important under the common law. Id. at 471. services, the contractor must have the right to “determine Based on a provision in its contract with the service pro- which resources to use in order to perform the work, and vider (Waiau) that allowed Avanti to terminate the contract how to use those resources.” See OAR 471-031-0181(3) without cause or liability on short notice (30 days), the (a)(A). They identify “means” of performing services court concluded that the “right to fire” was clearly present, as including such things as “tools or equipment, labor, definitively establishing at least one factor indicative of devices, plans, materials, licenses, property, work location, control. Id. at 472. and assets, among other things.” Id. With respect to the However, the court concluded that Waiau was an inde- “manner” of providing services, the rules define that term pendent contractor nonetheless, because “the various facts as the “method by which services are performed,” explain- bearing on the ‘right of control,’ with the notable exception ing that an independent contractor must have the right to of the right to fire, predominate[d] in favor of the conclu- “determine how to perform the work.” See OAR471031- sion that Waiau was an independent contractor.” Id. at 473. 0181(3)(a)(B). The only specific examples of a “manners” Thus, Avanti indicates that freedom from direction and of performing work that the rules give are “work sched- control should be found where factors indicating freedom ules” and “work processes and procedures,” but the rules “predominate” over facts suggesting control, even if some note that these examples are not exhaustive. Id. factors indicating control plainly exist. Avanti also provides answers to the second question posed above. In determining whether the hiring entity

2 TAXATION SECTION NEWSLETTER retained authority to control the service provider, the court whatever manner they chose. Id. at 427. However, the ALJ explained, an agency should focus on “the nature of the nonetheless found that Ponderosa maintained “significant services [the contractor] agreed to provide in the services direction and control,” based on the following facts: (a) agreement.” Id. at 468. In other words, it is error to find Ponderosa set the rate of pay for each clean, and the rates “control” based on the hiring entity’s retention of control were not negotiable; (b) Ponderosa assigned the work, over tasks or matters that it did not hire the contractor deciding which jobs were offered to each cleaner; and (c) to perform or oversee. See id. (“Avanti did not control the cleaners were not authorized to negotiate directly with the manner in which Waiau set prices or accepted orders, the property owners. Id. at 427-28. because those were not part of her services in the first On review, the court found that the ALJ had erred place.”). Instead, Avanti instructs, the proper focus is on in concluding that these factors established “direction whether the hiring entity retained control over the contrac- and control.” It concluded that the foregoing facts were tor’s means or manner of performing those services that “indicative of the results Ponderosa seeks from hiring a she actually agreed to provide, and that the hiring entity cleaner – that the rental unit will be clean when the tenant paid her to provide. Id. at 468-69. arrives at a reasonable and predictable price.” Id. at 428 Thus, in Avanti, that Avanti assigned Waiau her custom- (emphasis added); see also ORS 670.600(2)(a) (providing ers, provided the product for which she solicited orders, that the hiring entity can “specify the desired results” of an provided the promotional materials that she used to sell independent contractor’s services). They did not, however, that product, provided Waiau with business cards, and demonstrate any control by Ponderosa over how the clean- provided Waiau with her sole source of income during the ers performed the services for which Ponderosa had hired time period in question might have suggested economic them—in other words, the methods that they used to clean dependence, but those facts did not suggest control over and the supplies and equipment that they used to clean. Id. how Waiau performed the contracted services. See id. Thus, taken together, Avanti and Ponderosa Properties at 455-56 (noting that Waiau received all of her income establish in a fairly definitive manner that the eco- from Avanti, did not advertise or market her services as nomic dependence factors typically considered under the a product sales representative to others, and passed out common-law “economic realities” test are not properly Avanti business cards), 467 (noting that Waiau’s agree- considered in determining the existence of “direction and ment required her to visit specific Avanti customers a least control.” This is significant, because it clarifies that an once every 12 weeks), 470-71 (noting that Waiau’s use of independent contractor relationship can exist under670.600 trademarks, trade names, and other promotional material even if the hiring entity is solely responsible for obtaining pertained “more to what she solicits than to how she solic- all work performed by the service provider and for main- its”) (emphasis in original). That distinction was important, taining the relationships with the end customers receiving because 670.600(2)(a) places the focus on how the service the benefits of the services. In the past, administrative law provider provides “the services,” and the specific services judges with Oregon’s Office of Administrative Hearings that Avanti contracted with Waiau to provide were solicit- (OAH) have frequently reached the contrary conclusion ing orders and promoting Avanti’s products. Id. at 470-71. in cases before them. See, e.g., Ponderosa Properties, Therefore, the foregoing factors were not evidence of 262 Or App at 428 (quoting the ALJ’s reasoning that the “direction and control” because they were not relevant to “most significant[]” fact demonstrating control was that how Waiau actually performed her sales duties. Id. at 467 the cleaners “were not authorized to negotiate directly with (observing that there was “no evidence that Waiau was unit owners”); In the Matter of the Final Premium Audit required to use a specific sales technique when soliciting of Redding Transport (Proposed Order of OAH, Case No. orders”). INS 03 09-006, March 15, 2005), p. 8 (finding “funda- Another recent decision from the Oregon Court of mental control” where the transport broker “procured the Appeals, Ponderosa Properties, LLC v. Employment contract with the customer and selected the owner/operator Department,1 262 Or App 419 (2014), reinforces the to perform the work”).2 However, Avanti and Ponderosa approach adopted in Avanti. In Ponderosa Properties, the Properties reject the reasoning in these cases from the administrative law judge (ALJ) who heard Ponderosa’s OAH, and the ALJs with that office will be bound to fol- firstlevel appeal acknowledged that the cleaners who low Avanti and Ponderosa Properties going forward. worked for Ponderosa enjoyed freedom from direction and Finally, turning to the third question posed above, control in the sense that they worked independently and recent decisions from the Court of Appeals also indicate without supervision on each assignment, could accept or that demands emanating from third parties, business reject any work opportunities offered, and generally pro- conditions, or other outside sources—but not the hiring vided their own tools and supplies that they could use in entity—are not evidence of “direction and control” if they reflect “desired results” of the services or inherent 1 Not to be confused with Ponderosa Inn, Inc. v. Employment demands of the work. For example, in AGAT Transport, Division, 63 Or App 183 (1983), another case from the Oregon Court of Appeals addressing independent contractor classification. 2 Available at: http://www.cbs.state.or.us/ins/admin_actions/ actions_2006/wc_2006/billing_2006/03-09-006-p.pdf (PDF).

TAXATION SECTION NEWSLETTER 3 Inc. v. Employment Department, 256 Or App 294 (2013), In Compressed Pattern, LLC v. Employment the court ultimately upheld the ALJ’s determination that Department, 252 Or App 254 (2012), the court confirmed the contract drivers in issue were employees because they what this statutory language suggests, holding that it is not were not free from AGAT’s control over the means and enough to simply show that the service provider performs manner of providing the services. However, in the process the services away from the hiring entity’s premises. Id. at of reaching that conclusion, the court rejected certain 260-61. Rather, the hiring entity must prove that the ser- findings of the ALJ, including, most notably, the ALJ’s vice provider has made an actual investment in a separate finding that requiring the drivers to comply with certain business location. requirements imposed by AGAT’s customers indicated To conclude otherwise, the court reasoned, would “direction and control.” As the court observed in rejecting render superfluous the word “maintains.” The court could that finding, “AGAT’s requirement that its drivers meet the not ignore the presence of that word in subsection (3) expectations of AGAT’s customers regarding pickup and (a), if it was possible to logically interpret the statute in a delivery relates primarily to the ‘desired results’; it does manner that gave the word meaning, because ORS 174.010 not indicate control over the means or manner by which compels the Oregon courts to give meaning to each term drivers could achieve that goal.” Id. at 304. contained in a statute, wherever possible. Ponderosa Properties also addresses the issue of In the case before the court, the service provider was constraints that limit a service provider’s freedom, but providing drafting services for an architectural design originate from sources other than the hiring party. There, company, and he performed this work entirely offsite. the court rejected the Employment Department’s assertion However, as it so happens, his offsite location was the on appeal that there were sufficient facts to support a premises of his former employer, which let him use an finding of direction and control over the cleaners’ “work office and essential equipment for free. Consequently, the schedules,” which the administrative rules specifically court concluded that there was no evidence that the service cite as one example of a “manner” of performing services. provider “maintained” a business location. After all, he was See OAR4710310181(3)(a)(B). The court noted that the not required to pay any rent for the office space that he deadlines Ponderosa gave the cleaners were dictated by used, nor to pay for his use of other essential resources that when the occupancy of a unit required the work to be he used to provide the services (e.g., drafting tables). Id. at completed, and observed that these schedule constraints 259-61. therefore “flow[ed] from the nature of the business, and Another recent case that has relevance to the “business not [Ponderosa’s] desire to direct or control how the clean- location” factor is Chelius v. Employment Department, 258 ers performed their services.” 262 Or App at 428. Or App 72 (2013). There, the court’s focus was actually Thus, in summary, with respect to the “direction and on the “direction and control” element of ORS 670.600(2) control” element of 670.600(2)(a), opinions issued by (a). However, relevant to the court’s determination that the the Oregon Court of Appeals within the last few years taxpayer maintained “direction and control” was its obser- establish: (a) that freedom from direction and control exists vation that taxpayer contractually controlled the service even if a service provider is not completely free from con- provider’s “work location” by telling her where to work trol over the means and manner of providing the contracted (an office in her home) and limiting how she could use that services, as long as facts indicating freedom predominate; work space (for work purposes only). Id. at 81-82. Thus, (b) that the “dependence” factors of the common-law Chelius shows how important seemingly minor differences “economic realities” test are not properly considered in in contract drafting can be. Likely, the taxpayer imposed assessing freedom from control; and (c) that requirements the work location controls specifically to establish the imposed by third-party service recipients are not properly “maintains a business location” factor of ORS 670.600(3) weighed as evidence of control, insofar as they are best (a). However, by being too controlling, it unwittingly characterized as “desired results” of the contracted services doomed itself on the statute’s “direction and control” ele- (like having a rental unit ready on time for the service ment, and its service provider was therefore reclassified as recipient’s own customer, or complying with reasonable an employee. security protocols relating to the delivery of items that the Thus, to summarize, if a business plans to rely on the end customers impose on the hiring entity). “maintains a business location” criterion to support its classification of a service provider as an independent con- What Does ORS 670.600(3)(a) Mean by tractor, it must ensure that: (a) the service provider invests “Maintains a Business Location”? (or has invested) significant resources in a specific busi- The first criterion of the independently established ness location; and (b) that this location is dedicated to his business test is satisfied only if the service provider business, specifically (i.e., that the service provider does “maintains” a business location that is: (a) “separate from not use it primarily for personal, non-business purposes). the business or work location of the person for whom the Moreover, if the contract is for ongoing services for an services are provided”; or (b) “in a portion of the person’s indefinite period, the hiring entity may wish to include pro- residence and that portion is used primarily for the busi- visions in its written contract with the contractor that are ness.” ORS 670.600(3)(a). aimed at ensuring that this state of affairs continues for the duration of the parties’ working relationship. For example,

4 TAXATION SECTION NEWSLETTER the parties’ contract could require the contractor to submit reasoning.There, the court reaffirmed that the subsection proof, every six months, that the contractor is still paying (3)(b) examples are “disjunctive,” meaning that “[a]n rent for office space. It might also contain a provision individual is not required to satisfy all of them as if they requiring the contractor to immediately notify the hiring were four elements.” 262 Or App at 431. Moreover, as in entity if he gives up his separate business location (e.g., PCS, the court found that, in the circumstances presented, elects to start working from home, in lieu of continuing to the parties’ fixed-price contracts were alone adequate to rent office space). demonstrate that the service providers in question bore the Such provisions are well within the rights of a hiring risk of loss, stating: business, without disturbing the essential character of the “The fixed-price assignments demonstrate that the independent contractor relationship. On the other hand, cleaners bore significant risk. Regardless of the as the Chelius case demonstrates, a business should avoid condition of the unit or the time necessary to complete contract provisions that direct the contractor where to the task they would be paid only a fixed rate.” Id. at work, which could possibly convert an otherwise valid 431-32. independent contractor arrangement into an employment That the cleaners also were required to “fix defective relationship. work” before being paid only “underscored” that they bore a genuine risk of loss, in the court’s view. Id. at 433. Thus, What Does ORS 670.600(3)(b) Mean by although the court recognized that these two factors were “Bears the Risk of Loss”? only “two among a nonexclusive list of factors” set forth in Subsection (3)(b) of the statute provides that the “risk the statute, it found them sufficient to establish the risk of of loss” criterion can be established by showing the loss criterion “as a matter of law” on the record before it. presence of factors such as: “(A) The person enters into Id. at 433 n 7. fixed-price contracts; (B)The person is required to correct Undoubtedly, PCS and Ponderosa Properties are both defective work; (C) The person warrants the services quite helpful to businesses that use contractors to assist provided; or (D) The person negotiates indemnification in providing services to their customers. However, it is agreements or purchases liability insurance, performance important to recognize that the opinions in each case leave bonds or errors and omissions insurance.” room for the Court of Appeals to reach a different result in A recent decision from the Oregon Court of Appeals, the future if a case comes before it in which: (a) the one Portland Columbia Symphony v. Employment Department example of risk of loss that is present is not the “most rel- (“PCS”), 258 Or App 411 (2013), provides important evant” (as it was in PCS); or (b) there are other examples guidance regarding how to apply these factors. In PCS, or risk that you would normally expect to see for the type the court found that the symphony had properly classified of work in issue that are not present in the case at hand. the contract musicians in issue as independent contractors. Moreover, not all of the recent case law on the risk Id. at 413. Among the court’s more important findings, it of loss criterion has been favorable to businesses. For found that the ALJ who handled the symphony’s first-level example, in Compressed Pattern, supra, the hiring entity appeal had erred when assessing the risk of loss criterion attempted to show “risk of loss” by showing that the by “applying factors that have little relationship to the type service provider was “required to correct defective work” of work that the musicians were performing.” Id. at 427. without additional compensation. See ORS 670.600(3) The court explained that it is not always necessary to apply (b)(B). In support of this argument, the service provider each example of “bearing the risk of loss” referenced in (an architectural drafter) testified that he was “willing” the statute. Rather, the agency or ALJ assessing the crite- to correct defective work, and would have done so for rion must determine which factors are actually relevant by no additional charge. Compressed Pattern, 252 Or App “account[ing] for the nature of the work.” Id. at 426. Of at 262. However, this was not enough. The court found the examples listed in the statute, the court concluded that that the ALJ was justified in “discounting” the drafter’s the most relevant factor in the case before it was “one that willingness to correct his own mistakes, given “the nature the ALJ did not even mention: the fixed price contracts.” of the parties’ arrangement—i.e., no written contract; no Id. (This fact presumably showed risk because the job evidence that Singer would have been required to correct might end up requiring more rehearsal time than the defective work; payment based on hourly fee; and no contracted musician had contemplated, which equates to a liability insurance or performance bond carried by Singer.” risk of earning relatively little for a significant investment Id. (Emphasis in original.) of time that the musician could have been spent on more An important take-away from Compressed Pattern is profitable work.) this: although courts commonly look through contract lan- PCS is helpful for businesses using contractors because guage if it does not reflect realities on the ground, having a it suggests that showing just one of the statutory examples good written contract in place, to memorialize the essential of risk can be sufficient to establish the “risk of loss” elements of the independent contractor relationship, is criterion, at least if the example in question is plainly the nonetheless of critical importance. Practically, this should “most relevant” given the “nature of the work.” Moreover, be viewed as a necessary (but not sufficient) condition Ponderosa Properties, supra, reinforces and extends PCS’s to having independent contractor classification withstand

TAXATION SECTION NEWSLETTER 5 scrutiny by state agencies, ALJs, and the courts. For arrangements or long-time commitments.” Id. at 435. Still, example, if the parties intend that the contractor will fix the court suggested that its conclusions regarding whether defective work for no additional charge, they should not subsection (3)(c) was satisfied might have been different rely on an informal understanding; they should spell this had there been evidence in the record that the service pro- out explicitly in their contract. vider’s services for a third party had been performed “as a At the same time, in detailing the presence of the risk typical employee”—for example, as a “salaried custodian of loss criterion—or, indeed, any other criterion of the for a nearby school district.” Id. at 434. statute’s “independently established business” test—the Thus, Ponderosa Properties tells us that: (a) the tax- hiring entity should take care to avoid mandates and payer has the burden of proving that its service provider directives wherever possible, instead using recitals of provided similar services to others, but does not have the true facts and provisions requiring periodic proof of the burden of proving that she satisfied each element of ORS continued existence of those facts. For example, a contract 670.600 when providing those services; and (b) evidence should not state that the contractor “shall maintain liability that the service provider performed one paying job provid- insurance,” which an agency could view evidence of ing similar services for another person or entity within the “direction and control.” Instead, the better approach is to relevant 12-month period will normally be sufficient to recite that the contractor has such insurance, and include meet the taxpayer’s burden, even if the arrangement was contract provisions requiring the contractor to produce informal and the engagement brief; but (c) if the govern- proof of continued coverage periodically (perhaps every ment presents evidence that the service provider provided six months). services to the third party (or parties) as an employee, this might serve to rebut the hiring entity’s evidence and dis- What Does ORS 670.600(3)(c) Mean by prove the existence of the “two or more different persons” “Provide[s] Contracted Services for Two or criterion. (At least, this remains a possibility unless and More Different Persons”? until the Court of Appeals addresses this issue squarely and reaches the contrary conclusion.) To satisfy the third criterion of the independently On the whole, then, Ponderosa Properties is a very pos- established business test, the service provider must “pro- itive decision for Oregon businesses that use contractors. If vide contracted services for two or more different persons the court had sided with the Employment Department, this within a 12 month period, or … routinely engage in would have created an excessive and unrealistic burden on business advertising, solicitation or other marketing efforts any business hoping to rely on the “contracted services for reasonably calculated to obtain new contracts to provide two or more different persons” criterion to establish that its similar services.” ORS 670.600(3)(c). contractor is engaged in an independently established busi- That the statute refers to “contracted” services could be ness. Essentially, the Employment Department advocated read to suggest that the taxpayer has the burden of proving a “case within a case” method of proving this criterion, that the service provider’s working relationship with a third whereby a business would have to prove every element of party satisfies each element of ORS 670.600. However, in its contractor’s relationship with a third party to the same Ponderosa Properties, supra, the court reached the con- degree that it is obligated to prove the elements of ORS trary conclusion. There, on the initial administrative appeal 670.600 with respect to its own contractual relationship. before the case reached the Court of Appeals, the ALJ Businesses that use contractors can breathe a sigh of relief determined that Ponderosa had failed to meet its burden of that the court rejected this onerous burden of proof, espe- proof on the “two or more different persons” criterion. In cially since third parties will not always be cooperative so ruling, the ALJ disregarded testimony from two cleaners or responsive to a business’s request for assistance in its that they provided cleaning services to other businesses, dispute with the state. reasoning that the testimony was insufficient because there However, not all of the recent case law on subsec- was “no evidence that the services were performed as inde- tion (3)(c) has delivered good news for businesses. For pendent contractors.” Id. at 434 (quoting from the ALJ’s example, in Broadway Cab LLC v. Employment Dept., 265 opinion; emphasis omitted). Or App 254 (2014), the court rejected the taxpayer’s argu- The court, however, concluded that the ALJ had ment that the taxi drivers in question routinely engaged misapplied subsection (3)(c) by “interposing unnecessary in marketing efforts reasonably calculated to obtain new requirements in its analysis.” Id. Contrary to the ALJ’s contracts for similar services (the alternative way to prove conclusion, Ponderosa was not required to affirmatively that subsection (3)(c) is satisfied, in lieu of showing “prove the elements and criteria required to establish that actual performance of services for “two or more different each individual was an independent contractor” in relation persons”). Of note, the court reasoned that “a person’s to other entities for which she performed services. Id. ‘routine’ marketing efforts must be undertaken to help that Moreover, the court clarified that no proof of a “formal or person ‘obtain new contracts to provide similar services,’ written contract” between the service provider and third not to promote the services of another organization.” Id. parties is required to prove the “two or more different per- at 272. The court found that the marketing efforts in ques- sons” criterion, either. Rather, qualifying proof can consist tion failed that test because the drivers “could not legally of evidence of contracts that are “oral or written, one-time

6 TAXATION SECTION NEWSLETTER provide transportation services except under Broadway’s sification of an individual (Singer) who provided it with auspices,” and, therefore, “any advertising efforts that the architectural drafting services. Compressed Pattern asserted drivers undertook would, in the end, promote Broadway that evidence of Singer’s efforts to obtain an architectural itself, given that the drivers drove solely in taxicabs license—including paying more than $1,500 to take seven marked with the company’s name and colors.” Id. In short, licensing exams—was sufficient to prove the “significant that the drivers’ self-promotion could lead to more calls investment” criterion. and more money in their own pockets was insufficient; The court rejected this argument, stating in relevant part: rather, they had to routinely solicit work that they could “Singer’s services for petitioner and others involved and would perform separate from their work for Broadway only drafting, and an architectural license was not to establish that they “routinely engage[d] in … marketing required for those services. Singer apparently had been efforts,” for purposes of subsection (3)(c). pursuing an architectural license since 2002, including In conclusion, a taxpayer that plans to rely on the “two while he was an employee for GBD Architects. Singer or more different persons” criterion to pass the “indepen- also told an Employment Department investigator in dently established business” test needs to exercise care to February 2010 that he did not have a business. Thus, document the contractor’s provision of services to third there was evidence in the record to support the ALJ’s persons, and should be vigilant that the contractor at no factual finding that, although Singer had invested in an point becomes reliant on the taxpayer as her sole source of architectural license, he had not made that investment income. Among other things, the taxpayer should consider for the purpose of investing in any existing business.” including a provision in the service contract requiring 252 Or App at 263. that the contractor submit appropriate documentary proof Thus, Compressed Pattern indicates that it is not always every six months that she has provided similar contracted sufficient to show that the service provider has made sig- services to another entity within the past six months. That nificant investments that substantially enhance the quality proof should also indicate that the services were rendered of his services. Rather, the court’s opinion suggests that at as an independent contractor, and not as an employee. (For least two additional requirements must be satisfied if the example, a W-2 or paystub would not be especially helpful hiring entity is to be certain that the subsection (3)(d) “sig- to proving the “contracted services to two or more differ- nificant investment” criterion is satisfied: (1) if the invest- ent persons” criterion.) ment relates to a license or certificate, obtaining that license At the same time, the taxpayer should take care to or certificate must be required to provide the services, not avoid mandates and directives wherever possible, instead just enhance the service provider’s skills or marketability; using recitals of true facts and provisions requiring peri- and (2) the service provider must have an actual “business” odic proof of the continued existence of those facts. For in place when he makes the investment. example, a contract should not state that the contractor To the extent Compressed Pattern stands for the second “shall perform services for other parties,” as an agency proposition, the court’s reasoning seems misguided. True, would likely view this as evidence of “direction and subsection (3)(d) states that the service provider must make control.” Finally, as Broadway Cab teaches, the service a significant investment in “the business,” rather than “the provider’s services for third parties should be unconnected services.” However, Compressed Pattern fails to account to the contractor’s agreement with, or services for, the for the broader context. Specifically, the court’s opinion business seeking to establish her bona fides as an indepen- fails to consider the relationship between subsections (3)(d) dent contractor. and (2)(b) of the statute, the latter of which requires that the service provider have an “independently established busi- What Does ORS 670.600(3)(d) Mean by a ness” to qualify as an independent contractor. Subsection “Significant Investment in the Business”? (3)(d) provides that proof of a “significant investment” is To satisfy the fourth criterion of the independently one criterion that a taxpayer can use to show the existence established business test, the service provider must make a of an independent business. Therefore, it makes little sense “significant investment in the business.” ORS 670.600(3) to require the taxpayer to show that the service provider has (d). The statute provides three non-exclusive examples an “existing business” before it can establish that criterion. of what a “significant investment” might look like: (a) Interpreting the statute in that manner, as Compressed purchasing the tools or equipment necessary to provide Pattern seems to, puts the cart before the horse. A taxpayer the services; (b) paying for the premises or facilities where trying to prove that its service provider has an “indepen- the services are provided; and (c) paying for licenses, dently established business” should not be required to prove certificates, or specialized training required to perform the that she has an existing, stand-alone business to prove services. Id. one of the very criteria that the statute makes available to In Compressed Pattern, supra, the court addressed establish that she has an existing, stand-alone business. what is required to establish this criterion. There, the Evidently, this argument was not raised by the petitioner in taxpayer (Compressed Pattern), an architectural design Compressed Pattern (at least, the opinion makes no refer- firm, challenged the Employment Department’s reclas- ence to any such argument). However, in future cases, tax- payers challenging reclassification who can show that their

TAXATION SECTION NEWSLETTER 7 service providers made significant investments related to the What Does ORS 670.600(3)(e) Mean by services at hand should argue—based on the need to harmo- “Authority to Hire”? nize subsections (2)(b) and (3)(d) of the statute—that this To satisfy the fifth criterion of the independently is enough to prove the existence of the “significant invest- established business test, the service provider must have ment” criterion, without the need for additional proof that “the authority to hire other persons to provide or to assist their contractors specifically made such investments in an in providing the services,” and, also, “the authority to fire established business. The most logical interpretation of the those persons.” ORS 670.600(3)(e). statute is that the term “business,” as used in subsection (3) (d), should be read expansively, as encompassing any ser- In PCS, supra, the court provided some useful guid- vices performed for remuneration. Simply put, Compressed ance on this criterion. There, the Employment Department Pattern interprets the term “business” too narrowly. conducted an audit and concluded that the symphony’s contract musicians were actually its employees, resulting Similarly, since the examples of “significant invest- in an assessment of back unemployment insurance taxes. ments” set out in the statute are plainly intended to be On the symphony’s administrative appeal to the OAH, the non-exhaustive, it seems inappropriate to conclude, as ALJ upheld the Employment Department’s determination, Compressed Pattern seems to, that investments in licenses concluding that the symphony had failed to establish the or certificates must necessarily be disregarded as irrelevant necessary three criteria of the independently established if the license or certificate in question is not strictly business test. Among other things, the ALJ accepted the required to be able to lawfully perform the services in Employment Department’s assertion that the contract question. Since a license “required to provide the services” musicians lacked the “authority to hire” other musicians is merely cited in the statute as one example of a “signifi- to substitute for them when they were unable to perform, cant investment,” taxpayers challenging reclassifications in since: (a) some musicians never actually hired substitute the future, who can show that their service providers made performers; (b) the symphony reserved the right to approve significant investments in licenses, training, or certificates any substitute that one of its contract musicians proposed; that substantially enhanced the quality of their services or and (c) the symphony paid any substitutes directly (rather their marketability, might want to argue that this is suf- than paying the musician with whom it contracted and ficient to establish the “significant investment” criterion, leaving it to her to pay her substitute). even if there was no legal requirement that the service providers undertake the training or obtain the licenses or However, on review, the court concluded that the ALJ certificates to be able to lawfully provide the services. The erred by relying on irrelevant factors to conclude that the petitioner in Compressed Pattern did not appear to raise “right to hire” was absent. Specifically, it observed that: (a) this argument (no such argument is referenced in the opin- the statute requires only authority to hire others to assist ion, in any event), which in itself should be a valid ground in performing the service, not proof that the contractor for distinguishing Compressed Pattern in future cases actually exercised that authority; (b) the statute does not involving significant investments in education or training. require that the right to hire be “unfettered,” as it is com- mon practice, where personal services contracts are con- In conclusion, Compressed Pattern is a tough decision cerned, for the hiring entity to reserve “veto power” over for Oregon businesses that use contractors. However, as proposed substitutes; and (c)there is no requirement in the noted above, there are some good arguments available to statute that the contractor actually remit the payments to distinguish the case. In the meantime, businesses that use his assistants or substitutes (i.e., that the hiring entity pays independent contractors to assist in providing services to the substitute directly does not disprove that the contractor customers should take care to memorialize in their agree- had authority to hire). 258OrApp at 427-28. ments with those contractors the significant investments they have made, and continue to make, to be able to These conclusions will be welcomed by businesses that effectively provide the services. In so doing, they should use independent contractors to assist them in providing take care to avoid mandates and directives wherever pos- services to their customers. Still, PCS’s statement about the sible, instead using recitals of true facts in their place. For propriety of reserving “veto power” should be taken with a example, a contract should not state that the contractor grain of salt. The court made this statement in the specific “shall” pay rent for a separate office, as an agency would context of analyzing the requisite proof for establishing the likely view this as evidence of “direction and control.” right to hire criterion of subsection (3)(e). However, in cer- Instead, the better approach is to recite that the contrac- tain circumstances, reserving too much “veto power” might tor pays rent for an office space, shop, or storefront, and be viewed as direct evidence of the hiring entity’s retention include contract provisions requiring that he periodically of control, possibly dooming it on the statute’s direction and produce proof that he is continuing to lease that space. control element before the decisionmaker ever reaches the right to hire criterion of subsection ORS 670.600(3)(e). Indeed, the AGAT case, supra, illustrates this very danger. There, the court rejected AGAT’s “implicit contention” that it merely required its contractors’ substitute drivers to meet legal requirements for providing the services. (If true, this

8 TAXATION SECTION NEWSLETTER presumably would not have equated to “direction and contracts in place that fully spell out the nature of their control.”) In reality, the court found, AGAT went beyond business relationship with the contractor, and recite in some a mere contract provision requiring its contractors to hire detail the ways in which the contractor satisfies the neces- only qualified drivers. Instead, AGAT required that it con- sary three criteria of the statute’s “independently established firm the substitute drivers’ qualifications, including requir- business” test. Second, in seeking to affirm the presence ing them to pass a drug screen “as specified by AGAT.” 256 of the necessary three criteria, the contract should avoid Or App at 305 n 8 (emphasis in original). This equated to any suggestion that the hiring entity is imposing “direction control over the drivers’ use of “labor,” one of the “means” and control,” for example, by requiring that the contrac- of performing services specifically identified in OAR tor maintain a separate business location, perform similar 471-031-0181, the administrative rule through which the services for others, or hire assistants. Instead, the hiring Employment Department has interpreted the statutory term entity should make use of contract recitals to affirm the “direction and control.” presence of such factors. Third, to ensure that the contractor In addition to the AGAT case, businesses and their maintains a qualifying independent business over the course advisors should be aware of the court’s recent decision in of the parties’ relationship, the hiring entity should include Broadway Cab, supra. There, Broadway Cab argued that its contract provisions that obligate the service provider to contract drivers had “authority to hire” because they hired provide periodic proof that he still satisfies the criteria upon mechanics to maintain their taxicabs. 265 Or App at 275. The which the hiring entity will rely to show the propriety of its court rejected this argument, observing that hiring mechanics classification if it comes under scrutiny by an agency. For to perform maintenance did not demonstrate that the drivers example, the contract might require the contractor to submit, had the authority to hire people to assist them in performing every six months, documents showing that he has received “the services” that Broadway Cab had contracted the driv- payment from another person for providing similar services, ers to perform. Id.; see also ORS670.600(3)(e) (examining or proof that he is continuing to rent office space. whether the service provider has the authority to hire other persons to provide or to assist in providing “the services”). Thus, to summarize, PCS is a positive decision for Oregon businesses that use contractors to help service their custom- Taxation in Popular Culture: ers. If a hiring entity is willing to give its contractor authority Breaking Bad1 to hire others to assist in providing the contracted services, it makes sense to formally confer that authority via the par- By Dan Eller2 ties’ contract, even if both parties view it as unlikely that the contractor will actually exercise it. Under PCS, authority to “I’ve got three little letters for you: I. R. S. If they can get hire and fire is enough, even if unexercised. On the other 3 hand, having conferred hiring authority, a business must be Capone, they can get you.” – Saul Goodman careful not to retain too much control over its contractor’s hiring decisions. The AGAT decision illustrates the practical The challenge in reviewing Breaking Bad is to make the limitations on a hiring entity’s right to exercise the “veto hard call as to how much to cover. Breaking Bad is rich with power” that PCS concluded hiring entities can retain under tax content; to properly cover all of the tax references would the “authority to hire” criterion. According to AGAT, by require an article of great length or a series of shorter articles. effectively taking control of the screening process, AGAT In the end, I decided to reserve much of the Saul character exercised direction and control over its contract drivers’ use for a future article all to his own (in part out of the hope his of labor, dooming it on the first element of the independent spin-off will provide additional material) and, instead, to contractor test. Had AGAT instead left it to its contractors to vet their substitute drivers’ qualifications—including leaving it to them to arrange drug screens and imposing contractual liability on them if they failed to properly perform this duty—it might have stood a better chance of avoiding a find- 1 Breaking Bad is a production of AMC. ing of control. Thus, regardless what PCS says about “veto 2 Dan Eller is a shareholder in the Portland, OR office of power,” a hiring entity’s safest move is always to stay out of Schwabe, Williamson & Wyatt, who focuses his practice in its contractor’s hiring decisions to the full extent possible. the areas of tax and business law, advising clients with both transactional and controversy matters. Dan is the Past Chair Conclusion of the Oregon State Bar Taxation Section. I thank Caitlin Wong and Marc Sellers for their assistance in reviewing early versions Complying with ORS 670.600 can be tricky, but recent of this article. Special thanks go to Jennifer Woodhouse for decisions from the Oregon Court of Appeals at least pointing me to the IRS scene discussed herein. This article is provide businesses and their advisors with more guidance an outgrowth of a keynote address I made to a joint meeting of than they had a few years ago. They also emphasize that the IRS and TEI in May 2015. organizations using contractors to help serve their customers 3 “Kafkaesque.” Breaking Bad. AMC. May 16, 2010. We better should do three things. First, they should have well-drafted call Mr. Goodman “Saul” in this article.

TAXATION SECTION NEWSLETTER 9 focus here on how the show portrays the Internal Revenue The other way Breaking Bad portrays tax controversies Service4 and taxpayers’ views of and interactions with it. is in its handling of the Ted Beneke (“Ted”) character. Without spoiling the plot of Breaking Bad, you should Early in the show’s run, Ted is primarily included as a way at least understand the show centers upon how, with the to set up tension between Walter and his spouse, Skyler help of former student Jesse Pinkman (“Jesse”), Walter White (“Skyler”). Soon, though, we learn that Ted has White (“Walter”) started a drug business in order to pay been committing some form of accounting irregularities at for his cancer treatments. Ultimately, the White-Pinkman his business, Beneke Fabricators, to the tune of at least one drug business throws off a literal pile of cash,5 all of which million dollars.10 By the fourth season of Breaking Bad, is from an unlawful source and is not, at least initially, Ted returns in a desperate situation: he is going to meet taxed. With that in mind, you can begin to understand why with IRS Criminal Investigation (“IRS CI”) and he is wor- the topic of tax enforcement pops up here and there. ried about his liberty, not just the approximately $617K he 11 As the scene from which the Saul’s above quotation is or Beneke Fabricators is said to owe to the IRS. derived develops, we learn the bias of Breaking Bad: when Here is where Breaking Bad goes off-track, at least in the IRS sees criminal behavior that involves the underre- part. On the day of the IRS CI interview, we see Ted in a porting of income, the IRS will view those involved in the conference at the IRS with Special Agent James Picarus enterprise as “tax cheats”6 over any other type of criminal, (the “Special Agent”). Ted is struggling to explain to the whether it be a drug dealer or other crime lord. As to this Special Agent the reasons for the unreported or under- view of the IRS, Breaking Bad does a fair job of character- reported income issues the Special Agent is finding in izing the IRS’s primary job: the IRS is here to enforce the the books of Beneke Fabricators. At this moment, Skyler tax laws.7 It is true the IRS may work with other agencies enters the conference room unannounced and sits between to enforce other laws, but, as to the IRS’s focus, tax com- Ted and the Special Agent. In a few minutes of dialogue, pliance come first. At a minimum, Breaking Bad presents she explains away the accounting problems by acting an accurate picture of how the public views the IRS. clueless about even the most basic accounting concepts. Breaking Bad shows us at least two ways in which Next, we see Skyler and Ted walk out of the IRS, Skyler tax controversies may arise. The primary type of tax demanding Ted pay the debt to make the problem go away – implying that paying the tax debt will cause the IRS to controversy forms the basis of the show: how to deal 12 with millions of dollars of untaxed unlawful drug-sale stop threatening criminal action. proceeds. We see that Saul advises his clients to launder Frankly, so much is wrong with this scene that it the money as a way to “clean” the source of the money.8 portrays the IRS, not to mention tax procedure, in an inac- Why? As Jesse points out, these guys are already criminals curate light. For example, having been to the IRS offices in so why should they give a significant portion of their drug Portland many times over the years, it is my experience that proceeds to the government? The reason, Saul explains, is you cannot enter its conference rooms unannounced, espe- that it is often easier to prove someone is a tax cheat than a cially in the middle of a criminal investigation. That Skyler drug lord. If we look at unlawful drug enterprises through was able to do so boggles the mind. Similarly, it is unclear a narrow tax lens, this makes sense. that Skyler has any authorization to participate in this inves- tigation. Given the nature of the Section 6103 information On this point an important aside is warranted. In 13 one episode, Saul notes that Walter needs a “Danny” to shared in this scene, Skyler should have been required to accomplish his tax scheme.9 When I heard this, I sat up provide a Form 2848 Power of Attorney or otherwise estab- and closely listened. What was this Danny? My name is lish how authorized to participate in this interview. How she Danny – was anything to made of this? Well, as it turns was able to speak to the Special Agent is unclear. out, a “Danny” was a euphemism for someone who could help Walt accomplish the unlawful tax scheme. Just so we are on the same page, my name may be Danny, but I am 10 “Mandala.” Breaking Bad. AMC. May 17, 2009. The amount and no accomplice. source(s) of the tax fraud are never clear. Neither is the identity of the taxpayer. Skyler notes the accounting irregularities involved “almost one million dollars” in this episode, but we do 4 For simplicity, I will refer to the Internal Revenue Service as the not know if that is income or something else. Later we learn “IRS” in this article instead of “the Service” or, in the words, the obligation totals approximately $617K. Assuming Beneke again, of Saul, “The Tax Man.” Id. Fabricators was the taxpayer and it was a C corporation, it is 5 “Gliding Over All.” Breaking Bad. AMC. September 2, 2012. hard to come up with an obligation of $617K on one million 6 “Kafkaesque.” Breaking Bad. AMC. May 16, 2010. dollars of unreported income, especially given how little time 7 It is true that the IRS does not necessarily act alone in appears to pass between the months?/years? at issue and the the enforcement of tax laws. For purposes of this article, IRS Criminal Investigation scene described below. The same we assume that the “IRS” will be all government officials, can be said if the obligation was personal to Ted. regardless their agency affiliation, associated with a criminal 11 “Bug.” Breaking Bad. AMC. September 11, 2011. tax audit will act as a team, and that team will be labeled “IRS.” 12 Id. 8 Id. As noted, I intend to return to the Saul character in the 13 Kudos to the writers for mixing in a reference to “Section 61 future, focusing in particular on his “tax advice.” of the I.R.C.” as a reference for what defines the income of 9 “Abiqui.” Breaking Bad. AMC. May 30, 2010. Beneke Fabricators.

10 TAXATION SECTION NEWSLETTER Additionally, the implication that a Special Agent could tance would not have been a separate taxable event to him. be fooled by some hair flipping and uninformed comments Thus, he would been able to directly pay that money to seems laughable. Special Agents are trained to interrogate the IRS, reducing his outstanding liability to zero without suspects. They are on the lookout for all kinds of fraud and creating a new liability for the current tax year. So smart! deceit. Although someone will likely send me an article of In the end, the tax brains behind Breaking Bad were a rogue IRS employee who fell for a similar deceit, I find less fried than the eggs of the 1980’s era PSAs concerning this to be the sort of one-in-a-million occurrence as to be the dangers of drugs.17 The show’s awareness of the tax hyperbole in the context of this show. issues surrounding unreported and underreported income That being said, Skyler’s insistence that she is not was generally on-point, save some missteps. To the extent good with “the Quicken”14 has some merit because, in some of the misses are made in the nature of hyperbole the right context, it could be successful. Recall, this was and to drive other plot lines, those misses do not outweigh a criminal investigation. Tax crimes under the Internal that which the show gets right. On a scale of zero to 100, Revenue Code are crimes of specific intent that require therefore, I rate Breaking Bad a score of 280E. Any ques- someone to act willfully in order to be guilty of a crime. tions? The IRS would be looking for evidence of the taxpayer’s willful conduct upon which to rest any criminal charging decision. If Skyler was truly misinformed and that led to 17 See, e.g., https://www.youtube.com/watch?v=ub_a2t0ZfTs. the accounting irregularities, that type of conduct could be used to show the tax noncompliance was not criminal.15 If the Special Agent believed Skyler was responsible for the unreported income and that her conduct was not willful, Legislative Highlights from the 2015 that could cause the IRS to conclude the neither Ted nor Oregon Legislative Session Beneke Fabricators had engaged in any criminal behavior. Given these schemes are often coordinated by a business By Elizabeth Jessop1 owner and a bookkeeper – especially where a person relationship exists, as Skyler implies in the scene – it is difficult to believe the Special Agent would conclude no This article summarizes key pieces of tax legislation criminal tax fraud exists after a few minutes of scattered from the 2015 session. The author has attempted to choose discussion and terminate an investigation at this point.16 legislation that might be of the most interest to the Tax Section. Unless stated otherwise, the laws below take Finally, when Skyler insists that Ted pay the tax liability effect January 1, 2016. in order to cut off the investigation, the show’s writers imply that the IRS would terminate an active criminal inves- Tax Reporting of Multinational Corporations tigation if Ted were to simply pay the tax on the income he or the company omitted from his or its tax return(s). That (Tax Havens) is a serious miss, which is unfortunate because Skyler had In 2013, the legislature passed a law that required the acted brilliantly up until that point in the scene, apparently filer of an Oregon consolidated corporation excise tax getting Ted out of serious trouble by turning the focus return to add to its taxable income the income (or loss) of to herself in a way that did not put herself in jeopardy. a unitary foreign corporation in certain jurisdictions. This Taxpayers cannot disregard tax laws until such time as they new bill, SB 61, modifies the list of jurisdictions (currently are caught, then pay the tax (and, presumably penalties and found at ORS 317.715) by adding Trinidad and Tobago interest) in the middle of a criminal investigation as a way and Guatemala, and removing Monaco. The bill also to make it all go away. That is not how it works. replaced the reference to the former Netherlands Antilles Perhaps the explanation for Skyler’s demand that Ted with the names of its former constituent islands (Bonaire, pay the IRS obligation is that it sets up Skyler’s use of Curacao, Saba, Sint Eustatius, and Sint Maarten). Saul’s services to orchestrate a plan by which Ted would The bill also removes a requirement to take the appor- receive a fake inheritance from a distant relative in the tionment factors of the tax haven company into account. exact amount of Ted’s tax debt as a way of helping Ted pay that debt. Using an inheritance as the method for the Annual Corporate Minimum Tax: No Credits payment was ingenious because Ted’s receipt of the inheri- Sections 43-45 of Omnibus Bill HB 2171 amend ORS 317.090, the corporate minimum tax. Effective for tax 14 Id. years beginning on or after January 1, 2015 through 2020, 15 Other subtle factual issues lurk in this scene – who is the the corporate minimum tax cannot be reduced by any tax taxpayer? Ted? Beneke Fabricators? Was this solely an income credit. tax issue, or could it have involved payroll tax noncompliance? 16 That Ted and Skyler left the IRS believing they were off-the-hook 1 Elizabeth Jessop is an attorney at Immix Law Group in Portland, after what appeared to be a short exchange with the Special Oregon. She thanks Robert T. Manicke for his summaries of Agent is also unbelievable. In my experience, the IRS rarely 2015 tax legislation, which she used as a starting point as she makes decisions of this importance in a few minutes. prepared this article.

TAXATION SECTION NEWSLETTER 11 This amendment essentially repeals the Con-way v. which case, it is classified as county-appraised industrial Department of Revenue decision from 2013 (353 Or 616). property). Property valued at $1 million or less is county- In Con-way, the Oregon Supreme Court affirmed an appraised industrial property. Oregon Tax Court decision that Con-way could offset its Appeals of the assessed value for state-appraised indus- $75,000 corporate minimum tax liability with a $75,000 trial property must be brought in the Oregon Tax Court, Business Energy Tax Credit. while appeals of county-appraised industrial property must be brought in the county board of property tax appeals. Collection of Property Tax Upon Conveyance The deadline for appeals remains December 31. The to Government Body changes to the law apply to the property tax year beginning HB 2127 provides that a county clerk may not record July 1, 2015. an instrument conveying or contracting to convey fee title to real property to a tax exempt public body unless the Elimination of Extensions for Personal assessor of the county in which the real property is located Property Tax Returns attests in a certificate that all charges against the real prop- In accordance with HB 2484, personal property tax erty, including tax and interest, have been paid. This law returns will be due annually on March 15 instead of March applies as of October 5, 2015. 1, and extensions of time to file will no longer be granted. The new law applies to property tax years beginning on or Liens for Personal Property Tax after July 1, 2016. Under this new law, SB 161, a seller of “business per- sonal property” (tangible personal property, and machinery Central Assessment and equipment that a tax collector treats as personal prop- The Oregon Supreme Court held in Comcast v. erty pursuant to ORS 311.549) must provide a purchaser of Department of Revenue, 356 Or 252 (2014), that Comcast’s such property a disclosure notice that contains the follow- cable television service qualified as “data transmission ing information: services, ” and therefore as “communication” under ORS (1) Whether any property taxes assessed on the property 308.505 – meaning that Comcast’s cable television service are outstanding; business was subject to central assessment. Oregon’s cen- (2) Whether there are any liens against the property; tral assessment is unusual in that intangible property, such (3) The name of any county in which the property has as the value of the brand, is subject to the tax. ever been assessed for property tax purposes other than SB 611 makes changes to Oregon’s central assessment. the county in which the property is located at the time It imposes a cap on the value of the intangible property of the proposed purchase transaction; that is assessable by Oregon. The cap is 130 percent of the (4) The name and address of any other person that has company’s historical or original cost of its real property owned or had possession or control of the property; and and tangible personal property. Note that if this exemption (5) The fact that the bona fide purchaser provisions of applies, other exemptions in the law do not. the new law may apply to the purchase transaction. The law also allows exemptions from property tax for A bona fide purchaser, purchasing in good faith, for certain communication satellites, communication fran- value, at an arm’s length, and “without notice” of delin- chises, and certain residential high-speed communication quent taxes, will not be liable for property taxes that were services. The provisions regarding these exemptions are delinquent on the date of the transaction, or for interest found in HB 2485, which amends section 5 of SB 611. or fees related to the delinquent property taxes. In order The new law will generally apply to tax years begin- to meet the “without notice” standard, the purchaser must ning July 1, 2016. take several prescribed due diligence steps, including review of a new state registry of delinquent tax liens. Homestead Deferral The legislature further amended the senior and disabled Industrial Property Classification and Appeals person property tax deferral program during this session. HB 2482 amends the statutes that govern the appraisal HB 2083 amends ORS 311.670 to allow for an excep- of industrial property. The terminology used to classify tion to the five-year home ownership requirement. The industrial property has been changed from “principal exception will apply if the individual moved to the new industrial property” and “secondary industrial property” homestead from a home that had been granted a deferral, (these classifications were dependent on the real market the previous home had a greater real market value than the value of the property) to “state-appraised industrial prop- new homestead, the previous home was sold within a year erty” and “county-appraised industrial property.” of the purchase of the new homestead, the deferral liens Generally, state-appraised industrial property is were satisfied on the previous home, and the individual property with improvements valued at over $1 million on owed no more than 80 percent of the purchase price of the the previous year’s tax roll, unless the state has delegated new homestead. the responsibility for the appraisal to the county (in

12 TAXATION SECTION NEWSLETTER The law also includes new casualty insurance require- Heather enjoys building positive relationships with new ments and increases the real market value qualification and established tax attorneys alike. A longtime resident of limits for individuals who have continuously owned and Portland, Heather especially enjoys working with attorneys lived in a property for at least 21 years. who share her love for Oregon and the Pacific Northwest. The changes apply on or after July 1, 2016. Congratulations, Heather, on receiving the 2015 Mentor of the Year Award! Reconnection to Federal Tax Law and Same- Sex Marriage SB 63 is the reconnection bill for this session. As usual, this bill updates the references in Oregon law to the Hon. Jill A. Tanner to be awarded Internal Revenue Code that are not related to the definition 2016 Roberts Award of “taxable income.” HB 2478 changes numerous refer- ences from “husband and wife” to “spouses in a marriage.” The Honorable Jill A. Tanner, Presiding Magistrate, Suspension of Collections from Low-Income Oregon Tax Court - Magistrate Division, is the 2016 Individuals Oregon Women Lawyers Justice Betty Roberts Award win- ner. The Roberts Award will be given at the 24th OWLS HB 2089 requires that the Department of Revenue Roberts and Deiz Awards Dinner on Friday, March 11, offer to suspend collection from a taxpayer if his or her 2016 at the Portland Art Museum. income does not exceed 200 percent of the federal poverty guidelines based on the individual’s household size and Please join the OSB Taxation Section for this special household members, if the taxpayer has less than $5,000 event honoring Judge Tanner and Kellie Johnson at the in assets, and if the income is solely from a source that Portland Art Museum on the 2nd Friday in March. is exempt from garnishment. Even though collection is If you are interested in joining a Tax Section table, then suspended, interest continues to apply and the Department please do both of the following: of Revenue can file a lien against the taxpayer’s property. (1) Purchase your ticket(s) by following the “Click here Natural Resource Credit for the Oregon Estate to register” link at http://www.oregonwomenlawyers. Tax org/roberts-deiz-awards-dinner/Please be sure to indicate in the notes that you want to sit at an “OSB The definition of “natural resource property,” for the Taxation Section” table; then purposes of the natural resource credit on the Oregon Estate Tax Return, is changed by SB 864 to include only (2) Email [email protected] with the names of property located in the State of Oregon. registered attendees and menu selection to confirm your spot at a Tax Section table. Cost: Each person is responsible for his or her own Heather Kmetz ticket, and the Tax Section is only coordinating seating at the Tax Section table (or tables). Tickets are $90 per 2015 Mentor of the Year Award person ($65 for incomes under $50,000). Tickets are transferrable, but not refundable. If you The New Tax Lawyer Committee honored Heather need to transfer your ticket, then email Erin Dawson with Kmetz by awarding her the 2015 Mentor of the Year any name and menu changes before March 2. Award. The award, which is given to practitioners who You do not need to be an OWLS member to attend and are outstanding mentors to new tax lawyers, recognizes this event will sell out, so please do not delay. Heather’s commitment to integrating new tax lawyers into the legal community. Questions? Please email Erin Dawson at Heather, a partner at Sussman Shank LLP, believes [email protected] that encouraging new attorneys is a professional duty. As a member of the Tax Section’s Executive Committee, Heather tries to foster ties between rising attorneys and established tax attorneys. Heather is also generous with her own time. She maintains an informal network of mentees who are at different stages of their legal careers. When these mentees have questions about professional develop- ment or substantive tax issues, Heather is quick to offer them support and advice.

TAXATION SECTION NEWSLETTER 13 Award of Merit Future Events The Executive Committee of the OSB Taxation Section would like to recognize and honor those among us who Feb 16, 2016 exemplify professionalism in the practice of tax law in Mid-Valley Tax Forum the State of Oregon. In 2009, we presented the Taxation Affordable Care Act Update Section’s first Award of Merit to David Culpepper. Christine Moehl, Saalfeld Griggs, PC Subsequently, the award has been presented to Robert 12:00 – 1:15 p.m. Manicke (2010), John Draneas (2012), the Honorable Henry C. Breithaupt (2013), Mark Golding (2014), and Feb 18, 2016 Larry Brant (2015). We are now accepting nominations for Portland Luncheon Series: International Tax Planning the Taxation Section’s fifth Award of Merit. Nominations Portland must be received by April 15, 2016. There is no guarantee 12:00-1:30 p.m. that an Award will be presented during 2016, the Executive Presenter: David Cordova, Deloitte Tax LLP Committee is striving to ensure that the Award is only given to candidates who truly deserve it. The Award Mar 07, 2016 will be granted to the candidate the Committee believes New Tax Lawyer Committee: Monthly Meeting Portland to best personify the Oregon State Bar’s Statement of 12:00-1:00 p.m., Thede, Culpepper, Moore, Munro & Silliman LLP Professionalism, and best serves as a role model for other (111 SW Fifth Ave., Ste. 3675) lawyers. Factors considered include competence, ethics, conduct with others and the courts, and pro bono contribu- Mar 16, 2016 tions to the Bar and tax system. The candidate’s accom- New Tax Lawyer Committee: Social Hour plishments must fall within the tax field. If a recipient is Portland selected, the Award will be presented at the 16th Annual 5:30-7:00 p.m., The Original (300 SW Sixth Avenue) Oregon Tax Institute on June 2, 2016. More information about the criteria for the award and Mar 17, 2016 the nomination form is available online at www.osbartax. Portland Luncheon Series: Tax Issues for the Tax Exempt com/Award-of-Merit. Portland 12:00-1:30 p.m. Presenter: William Manne, Miller Nash Graham & Dunn LLP

Mar 23, 2016 New Tax Lawyer Committee: Speaker Series: Tax Conse- quences of Buying, Holding, Modifying, and Disposing of Debt Instruments Acquired on the Secondary Market Portland Speaker: Paul Paschelke Time & Location: Noon-1:15, Miller Nash Graham & Dunn LLP (111 SW Fifth Ave., Suite 3400)

Apr 04, 2016 New Tax Lawyer Committee: Monthly Meeting Portland 12:00-1:00 p.m., Location TBA

Apr 20, 2016 New Tax Lawyer Committee: Pub Talk Portland 5:30-7:00 p.m., The Original (300 SW Sixth Avenue)

Apr 20, 2016 Portland Luncheon Series: Oregon Legislative Update Portland 12:00-1:30 p.m. Presenter: Robert Manicke, Stoel Rives

14 TAXATION SECTION NEWSLETTER May 02, 2016 Jul 20, 2016 Oct 19, 2016 New Tax Lawyer Committee: Monthly New Tax Lawyer Committee: Speaker New Tax Lawyer Committee: Social Hour Meeting Series: International Taxation 101 Portland Portland Portland 5:30-7:00 p.m., The Original 12:00-1:00 p.m., Location TBA Speaker: Justin Hobson (300 SW Sixth Avenue) Noon-1:15 p.m., Miller Nash Graham & May 18, 2016 Dunn LLP (111 SW Fifth Ave., Suite 3400) Oct 20, 2016 New Tax Lawyer Committee: Social Hour Portland Luncheon Series: Portland Jul 20, 2016 Nonqualified Deferred Compensation 5:30-7:00 p.m., The Original New Tax Lawyer Committee: Social Hour Portland (300 SW Sixth Avenue) Portland 12:00-1:30 p.m. 5:30-7:00 p.m., The Original Presenter: Lorne Dauenhauer, Ogletree May 18, 2016 (300 SW Sixth Avenue) Deakins Portland Luncheon Series: Structuring Issues in NMTC Transactions Aug 01, 2016 Nov 07, 2016 Portland New Tax Lawyer Committee: New Tax Lawyer Committee: 12:00-1:30 p.m. Monthly Meeting Monthly Meeting Presenter: Alan Pasternack, Kantor Taylor Portland Portland Nelson Evatt & Decina PC 12:00-1:00 p.m., Location TBA 12:00-1:00 p.m., Location TBA

May 25, 2016 Aug 17, 2016 Nov 16, 2016 New Tax Lawyer Committee: Speaker New Tax Lawyer Committee: Social Hour New Tax Lawyer Committee: Social Hour Series: Tax-Exempt Organizations 101 Portland Portland Portland 5:30-7:00 p.m., The Original 5:30-7:00 p.m., The Original Speaker: June Wiyrick-Flores (300 SW Sixth Avenue) (300 SW Sixth Avenue) Noon-1:15 p.m., Miller Nash Graham & Dunn LLP (111 SW Fifth Ave., Suite 3400) Sep 05, 2016 Nov 17, 2016 New Tax Lawyer Committee: Portland Luncheon Series: Jun 02-03, 2016 Monthly Meeting Perspectives and Updates from the Bench Oregon Tax Institute Portland Portland Presenters: Various 12:00-1:00 p.m., Location TBA 12:00-1:30 p.m. Time: TBA Presenter: Judge Henry Breithaupt, The Multnomah Athletic Club Sep 15, 2016 Oregon Tax Court Portland Luncheon Series: Jun 06, 2016 What’s New at DOR Dec 05, 2016 New Tax Lawyer Committee: Portland New Tax Lawyer Committee: Monthly Meeting 12:00-1:30 p.m. Monthly Meeting Portland Presenter: Oregon Department of Revenue Portland 12:00-1:00 p.m., Location TBA 12:00-1:00 p.m., Location TBA Sep 21, 2016 Jun 15, 2016 New Tax Lawyer Committee: Pub Talk Dec 28, 2016 New Tax Lawyer Committee: Pub Talk Portland Portland Luncheon Series: Portland 5:30-7:00 p.m., The Original Federal Legislative Update 5:30-7:00 p.m., The Original (300 SW Sixth Avenue) Portland (300 SW Sixth Ave) 12:00-1:30 p.m. Oct 03, 2016 Presenter: Mark Prater, Jun 23, 2016 New Tax Lawyer Committee: Senate Finance Committee Portland Luncheon Series: The Complete Monthly Meeting Anatomy of a QSub Election--Not Just the Portland Nuts and Bolts 12:00-1:00 p.m., Location TBA Portland 12:00-1:30 p.m. Presenter: Larry Brant, Garvey Schubert Barer Oct 19, 2016 New Tax Lawyer Committee: Speaker Jul 11, 2016 Series: Corporate Tax Issues: Formation New Tax Lawyer Committee: and Capitalization Monthly Meeting Portland Portland Speaker: David Brandon 12:00-1:00 p.m., Location TBA Noon-1:15 p.m., Miller Nash Graham & Dunn LLP (111 SW Fifth Ave., Suite 3400)

15 TAXATION SECTION NEWSLETTER